Why Did Robinhood Places Restrictions on GameStop?

Many people are upset with Robinhood for refusing to allow customers to see shares of GameStop. There are a lot of conspiracy theories for why.

The real reason is much less interesting.

The question is whether such critics will dig into the industry’s inner workings, where pressure mounted on Robinhood and other firms to limit certain trades. That would put a rare spotlight on arcane parts of the market designed to prevent catastrophe, such as the Depository Trust & Clearing Corp.

One key consideration for brokers, particularly around high-flying and volatile stocks like GameStop, is the money they must put up with the DTCC while waiting a few days for stock transactions to settle. Those outlays, which behave like margin in a brokerage account, can create a cash crunch on volatile days, say when GameStop falls from $483 to $112 like it did at one point during Thursday’s session.

“It’s not really Robinhood doing nefarious stuff,” said Bloomberg Intelligence analyst Larry Tabb. “It’s the DTCC saying ‘This stuff is just too risky. We don’t trust that these guys have the cash to be able to withstand settling these things two days from now, because in two days, who knows what the price could be, it could be zero.

Sure enough, Robinhood raised $1 billion.

And now, the broker has removed its trading curbs.

Posted by on January 29th, 2021 at 12:47 pm


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